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April 3 - May 28, 2022
Some large retailers with the budget and time to invest in it will generate prices algorithmically based on supply, demand, and constant testing, which in some cases leads to absurd pricing[25] or recommendations based on factors such as browser type.
If less than 40% of last year’s buyers will buy this year, then the focus of the business is on new customer acquisition.
If 40–60% of last year’s buyers will buy this year, then the company will grow with a mix of new customers and returning customers.
If 60% or more of last year’s buyers will buy something this year, the company needs to focus on loyalty, encouraging loyal clients to buy more frequently. Loyalty programs work well only if the retailer has this kind of engagement, and only 10% of e-commerce businesses end up in this mode when mature. Amazon is a good example of a company in this mode.
Online retailers need to understand what messages, on what platforms, generate the kinds of visitors who buy things. Once they’re on the site, the emphasis is on maximizing the amount of stuff a buyer will purchase.
“The key to successful e-commerce is in increasing shopping cart size; that’s really where the money is made. I like to think of customer acquisition cost as a fixed cost, so any increase in order size is expanding your margin.”
Tools like ClickTale perform abandonment analysis within the form itself, making it easier to pinpoint bottlenecks in the conversion process where you’re losing customers.
The reason Google has a free analytics product is because the company makes money from relevant advertising, and wants to make it as easy as possible for you to buy ads and measure their effectiveness.
However, the team was well aware of the challenge which is faced by all e-commerce sites: striking a balance between optimizing sales transactions and optimizing overall revenues.
Page optimization is important. But be sure you’re optimizing the right metric. You don’t just want a high conversion rate — though that’s good. You want high revenue per visitor, or high customer lifetime value (CLV), because that’s what’s really driving your business model.
Big e-commerce companies use recommendation engines to suggest additional items to visitors. Today, these engines are becoming more widespread thanks to third-party recommendation services that work with smaller retailers.
as the total number of loyal users grows, renewal revenue represents a significant portion of total revenue.
CLV and CAC are the two essential metrics for a subscription business.
In Backupify’s case, the ratio of CLV to CAC is 5–6x, meaning that for every dollar the company invests in finding a customer, it makes back $5 to $6.
Customer acquisition payback is a great example of a single number that encompasses many things, since it rolls up marketing efficiency, customer revenue, cash flow, and churn rate.
There’s a natural progression of metrics that matter for a business that change over time as the business evolves.
The problem wasn’t the business model — it was the pricing and the messages it sent to prospects.
Just because SaaS is a recurring service doesn’t mean it needs to be priced that way. If your product is ephemeral — like a transient job posting — it might be better to offer more transactional pricing. Pricing is a tricky beast.
As we’ve seen, some SaaS companies use a freemium model to convince people to use the service, and then make money when those users exceed some kind of cap. A second approach is a free trial, which converts to a paid subscription if the customer doesn’t explicitly cancel after a certain time. A third approach is paid-only.
In SaaS, churn is everything. If you can build a group of loyal users faster than they erode, you’ll thrive.
For Lean startups, an app store model[34] presents a challenge. Unlike web applications, where it’s easy to do A/B testing and continuous deployment, mobile apps go through the app store gatekeeper — which limits the number of iterations a company can undergo, and hampers experimentation.
ARPU is simply the revenue you’ve made, divided by the number of active users or players you have. If you inflate the number of active players to make yourself look good, you’ll reduce the ARPU, so this metric forces you to draw a realistic line in the sand about what “engaged” means. Typically, ARPU is calculated on a monthly period.
Track churn at 1 day, 1 week, and 1 month, because users leave at different times for different reasons. After one day it could be you have a lousy tutorial or just aren’t hooking users. After a week it could be that your game isn’t “deep enough,” and after a month it could be poor update planning.
Wooga iterates constantly and releases updates on a weekly basis. It picks a key metric to focus on for an update — retention, for example — and identifies a number of tactics to try to improve it.
Mobile apps make their money in a variety of ways. Most of the money comes from a small number of users; these should be segmented and analyzed as a distinct group. The key metric is average revenue per user, but you may also track the average revenue per paying user, since these “whales” are so distinct.
Finally, the site sells sports books through an affiliate relationship with an online bookstore. It features a “book of the week” on every page; it doesn’t make money when someone clicks the link to that book, but it does make money when someone buys the book (see Table 11-5).[38]
Striking a balance between commercial screen space and valuable content is tricky.
Ad networks set pricing for affiliate and pay-per-click advertising based on bidding by ad buyers.
Media sites involve a lot of math; sometimes they feel like they’re being designed by spreadsheets rather than editors. Many of the vanity metrics we’ve warned you about earlier are actually relevant to media sites, since those sites make money from popularity.
Note that sometimes an effective campaign can mask a churn problem. In this example, even though the site grew by 2,000 unique visitors in April, it managed to lose 1,000 visitors as well.
The ratio of sessions (on your site) to clicks (from search links or referring links) is an indicator of web performance and reliability.
Visitor demographics will become increasingly important as social platforms like Facebook introduce third-party-placed advertising based on demographic segments — you’ll get paid based on who your visitors are rather than what your site contains.
If you’re serious about content, you need to test different layouts for revenue-versus-churn, and different copy for content-versus-ad-value.
There are commercial tools to help with this. Parse.ly, for example, tries to analyze which content is getting the most traction. You might also segment key metrics like revenue or percentage of visitors who exit on a particular page by author, topic, or layout.
As more and more mobile devices become sensors that track our health, our location, our purchases, and our habits, we’ll see a split into active content generation (sharing a link, writing a post) and passive content generation (automatically populating a timeline with our actions; helping the system learn from our clickstream). This shift gives a huge advantage to those who make the tools for collecting data — mobile device makers, payment companies, and so on.
Two-sided marketplaces face a unique problem: they have to attract both buyers and sellers. That looks like twice as much work. As we’ll see in some of the case studies ahead, companies like DuProprio/Comfree, Etsy, Uber, and Amazon found ways around this dilemma, but they all boil down to one thing: focus on whomever has the money. Usually, that’s buyers: if you can find a group that wants to spend money, it’s easy to find a group that wants to make money.
The first step of a two-sided marketplace — and the first thing to measure — is your ability to create an inventory (supply) or an audience (demand).
“I almost always recommend modeling the buyer side as your primary focus, and then you model supply, more in the sense of total inventory,” he says. “It’s easy to find people that want to make money; it’s much harder to find people that want to spend money.”
In many two-sided markets, searches are the primary way in which buyers find sellers. You need to track the number of searches that return no results — this is a lost sales opportunity.
You should also look at the search terms themselves. By looking at the most common search terms that yield nothing, you’ll find out what your buyers are after.
The ratio of searches to clicked listings is also an important step in your conversion funnel.
In a startup, your business model — and proof that your assumptions are reasonably accurate — is far more important than your business plan. Business plans are for bankers; business models are for founders.
Initially, as we’ve pointed out, you’ll use qualitative metrics to measure whether or not the problem you’ve identified is worth pursuing. You start this process by conducting problem interviews with prospective customers. We suggest that you speak with 15 prospective customers to start. After the first handful of interviews, you’ll likely see patterns emerging already. Don’t stop talking to people. Once you get to 15 interviews, you should have the validation (or invalidation) that you need to help clarify the next steps.
There are other interesting tools for digging into Twitter and finding people. Moz has a tool called Followerwonk, and there’s also the freely available people search engine, Twellow.
Google also has a survey offering, called Google Consumer Surveys, that’s specifically designed to collect consumer information.[54] Because of the wide reach of Google’s publishing and advertising network, the company can generate results that are statistically representative of segments of the population as a whole.
Your earlier problem interviews showed you an opportunity; now, you’re checking to see whether that opportunity exists in the market as a whole. For each quantifiable question, decide what would be a “good” score. Write it down somewhere so you’ll remember.
When you run the survey, measure your cost per completed response. Do a small test of a few dozen responses first. If your numbers are low, check whether people are abandoning on a particular form field — some analytics tools like ClickTale let you do this.
It’s important to contrast an MVP with a smoke-test approach where you build a teaser site — for example, a simple page generated in LaunchRock with links to social networks. With a smoke-test page, you’re testing the risk that the message isn’t compelling enough to get signups. With the MVP, you’re testing the risk that the product won’t solve a need that people want solved in a way that will make them permanently change their behavior. The former tests the problem messaging; the latter, the solution effectiveness.
Testing the problem vs testing the solution (MVP)
